04 Nov 2008

Calculated Risk on Housing Prices

I was heartened to read this over at Calculated Risk
earlier today. It’s mainly a link to a WSJ article, but the punchline
is blunt:

Any attempt to keep house prices artificially high will just
postpone the inevitable and delay the eventual recovery.

At least somebody seems to get it. Pity that ‘somebody’ doesn’t seem
to include, oh, anybody in Washington. At least not yet, but the gist
of the article is that the truth is beginning to sink in.

Unfortunately I think it’s too late for that truth to have prevented a
costly and probably pointless bailout, but it might be in time to
prevent too much meddling in the retail real estate market. Of all
the markets that need a good cleansing burn, that’s it. However, it’s
also the one prone to attracting the most interference from Congress,
as idiots who forgot that a house should be a place to live first –
and not an ATM or an IRA – squeal and moan as they learn that actions
have consequences.

The most dangerous idea to creep in is that a decline in housing
prices is, by itself, somehow bad. Whenever you see someone in a suit
pointing to the decline in prices and suggesting that it is a problem
to be solved, be afraid. It’s dangerous for two reasons: one, because
it’s wrong – inflated housing prices were a symptom of the credit
bubble, and their decline is quite natural as that bubble works itself
out; two, because it’s an easy target for government intervention.

There’s nothing politicians like better than treating the symptoms of
a problem; it’s so much easier, after all, than actually going after
the root cause, and most of the time the public never notices the
difference.

If the government succeeds in convincing the public (and Wall Street,
who on the whole haven’t shown themselves to be much more savvy than
the public at large anyway) that the decline in prices is a symptom
that ought to be treated, and somehow find a way to prop those prices
up at their inflated levels, a generation of financially responsible
Americans will be effectively locked out of home ownership. I really
can’t imagine anything more toxic to the long-term faith of the public
in the markets than that.